Student Loan Refinancing

    

If you borrowed money to pay for college, at some point, you may want to consider refinancing those student loans. For some borrowers, refinancing offers an opportunity to save money and better manage their budget. For others, it may not be the best choice. Read on to help you make an educated decision about whether refinancing is right for you.

Guide Contents
  1. What is Refinancing?
  2. Evaluating your current situation
  3. How much can you save?
  4. Do you qualify to refinance?
  5. Refinancing vs. consolidation
  6. Is refinancing right for you?
  7. Refinancing FAQ

What is Refinancing?

College loan refinancing allows you to take on a new loan that will pay off your existing loan(s). Any benefits, rates, and terms that you had on your existing loan(s) go away and you adopt the terms, benefits, and rates of the new loan. This can be a great thing for some folks, and trouble for others. Whether or not refinancing is a good move depends on your goals and personal situation.

When done wisely and responsibly, college loan refinancing can:
  • Reduce your interest rate and total amount to repay
  • Reduce the number of bills you have to manage
  • Fix the rate on variable loan rates
  • Reduce monthly payments
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Evaluating Your Current Situation

Whether or not refinancing your college loans will make a difference for you will depend on your individual goals and circumstances. 

Interest rates can vary widely from loan to loan and whether or not a refinance loan is right for you will often depend on the interest rate you currently pay and the interest rate on your new refinance loan. Depending on your individual situation, refinancing higher rate loans into a lower rate loan could save you thousands of dollars. You may also be able to avoid costly rate hikes in the future if your current loans are variable rate and you refinance with a fixed rate loan.

If you currently have only Federal Stafford Loans with fixed rates below 6% and don't have any private student loans, then it may be wise not to refinance, especially if you work in the public sector. However, if you have parent or graduate student PLUS loans or private loans, refinancing could be a good option. Some considerations you need to take into account are:
  • The interest rate(s) on your existing loans
  • The length remaining in your repayment term
  • Your credit rating
  • Where you went to school
  • The degree you earned
  • Your loan types
  • If your loans are fixed or variable rate

TIP: Aren't sure what your current interest rates are? Go to the National Student Loan Data System to look up your federal student loan rates. Contact your loan servicer to get your rate on any non-federal loans.

Lower Interest Rate

How much can you save?

The amount you can save by refinancing depends on several factors including:
  • The total amount you owe
  • How much time you have left in your loan term
  • The length of the term on your refinance loan
  • Your current interest rate, and whether it is fixed or variable
  • The interest rate of your refinance loan, and whether it is fixed or variable
Interest can make a huge impact on your total borrowing costs; often more than most people realize. For example, let's say you have $75,000 in education loans. Take a look at the chart below to see what the total amount to repay would be over a ten-year term based on different interest rates.

Refinancing Example

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Do you qualify to refinance?

Unfortunately, refinancing isn't an option for everyone. If you are looking to refinance your loans, you are going to need to have good credit, or at least have a cosigner with good credit. What exactly does that mean? Although criteria varies from lender to lender, having good credit typically means:
  • Being current on all of you existing debt
  • Having little to no delinquency of your outstanding debts over the past few years
  • Having a credit score at least in the mid 600's, but often higher
  • Having no public records such as judgments, liens, or bankruptcies on your credit report
  • Being able to demonstrate your monthly earnings and meeting the lender's minimum earning thresholds

In some cases, you will need to have finished school in order to refinance or risk surrendering your in school deferment, so be careful to ask the right questions if you are still enrolled.
Some lenders also look at the school the student attended, the degree earned, or where you work to determine your eligibility and/or interest rate.

 
Refinance student loan

Refinancing vs. Consolidation

Whether you are a parent or student, if you are thinking about restructuring your college debt, you may be wondering about the difference between student loan refinancing and consolidation. The primary difference is that consolidation, in the technical sense, is only for federal student loans (although you may find some private lenders calling their refinancing product a "consolidation loan") whereas refinancing can be for either federal or private student loans.

Federal Consolidation

Federal education loans, including Stafford loans (now called Direct Unsubsidized and Subsidized Loans), PLUS Loans, and Perkins Loans are eligible for the Federal Consolidation Loan Program. This is a government run program that combines your federal education loans into a single consolidation loan with a single monthly payment, often times lengthening the term and reducing your monthly payment. The interest rate a student or parent receives on his or her Federal Consolidation Loan is a weighted average of the rates on his or her existing loans. If you are part of the crowd that still has a variable rate federal education loan, the consolidation program would also fix that rate for the life of your loan.

The student loan refinancing process is done through a state-based or private lender who pays off your existing student loans and issues you ina new loan. The terms and benefits on the old loans go away, and this is important to note for students who have federal loans. If you think you will need to take advantage of federal programs like deferment, income-driven repayment, or  public service loan forgiveness, you will want to stick with your federal loans. Consolidation will allow you to keep those benefits. Keep in mind that the benefits on Federal PLUS Loans are not as extensive as those on other types of federal education loans, so you may find that the benefits of refinancing those outweigh the risks.

If you have private loans, or you don't think you will take advantage of the federal repayment programs on your federal student loans, refinancing may be right for you. People choose to refinance their student loans to lock in lower interest rates, convert variable rate debt to fixed rate debt, make monthly payments more manageable, and shorten (or lengthen) the overall repayment period. If you have a great credit score, clean credit history, and a full-time job, then you'll likely get more attractive terms from private lenders. Even if your credit score and income is on the low side, you still may be eligible for a loan with good terms by refinancing with a cosigner.

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Is refinancing right for you?

You've learned that refinancing isn't for everyone. To determine if it is right for you, you'll need to assess your current situation and carefully consider your options. Start by asking yourself these questions:

What kind of loans am I looking to refinance?
  • Know your existing loan types and the benefits that come with them. Make sure you understand whether your existing loans have a fixed or variable rate. 
  • Federal student loans offer benefits that you will no longer be eligible for if you refinance them. If you don't think you'll use them, you may be okay with this, but awareness is the first part of making an informed decision. View the list of federal benefits you could lose.
  • If you have private loans, make sure you understand what benefits your lender currently offers for benefits.
What are my existing balances, rates, and terms?
  • Before searching, look up each of your loans and make sure you know this information. It is hard to compare rates and terms and calculate any savings if you don't know the key characteristics of your current loans.
What are my goals?
  • Do you want a better rate? To pay off your loans faster? To pay less in the long run? Have fewer bills?
  • Pinpoint your goals before you start looking for a program so you will have a clear picture of what you need in order to proceed.
  • Use online calculators to help you see how much you can save by refinancing, either in the monthly payment amount or in total borrowing costs.
How's my credit?
  • Refinancing your existing student or parent education loans will require a credit check.
  • You'll also most likely have to provide proof of income and show you have the ability to repay.
  • Many programs offer credit-based pricing. This means the rate you receive will be based on your credit score and potentially other factors (education level, degree of experience, income, etc.).
  • Remember, most applicants don't receive the lowest advertised rate. Apply, find out what your rate will be, and cancel your application if the rate you receive doesn't meet your expectations. Comparison shopping is always wise.
Will I use a cosigner?
  • In order to qualify for some programs, you may need to have a credit-worthy cosigner. Even if one isn't required, it's possible that having a cosigner will qualify you for a lower rate. Figure out if you have a cosigner, and understand that they will be as equally obligated on the loan as you are.
 
Refinance student loans

Refinancing FAQ

When can I refinance?
  • If you are a student, you may have to wait until you finish school in order to refinance your education loans or risk surrendering your in school deferment. If you are still enrolled, make sure to ask the right questions about when repayment starts before refinancing.
  • If you are a parent, some programs will allow you to refinance PLUS loans and private loans in your name while the benefiting student is still in school. Ask the lender.
Which loans can I combine when I refinance?
  • To be eligible to refinance your loans under a student loan refinancing program, your loans must have been used for qualifying education expenses. If you paid for your education expenses on a credit card, you will not be able to refinance those charges under an education refinance loan. 
  • Federal loans may be combined with private loans under most programs, but you lose any benefits on your federal loans once they are refinanced. PLUS loans have far fewer benefits than federal student loans and if you don't think you will use your benefits, you may think refinancing is worth the risk.
  • Husband and wife can typically combine PLUS loans if they are both signers on the new refinance loan.
  • Under some programs, a student can refinance his or her parent's PLUS loans if he or she is the named beneficiary of the PLUS loan. Other programs will not allow a student to refinance a parent PLUS loan in his or her own name unless the parent is consigning the new refinance loan.
  • Graduates usually can combine Graduate PLUS Loans with their other loans without trouble.
  • Refinancing can be a smart way of removing a cosigner from a loan, as long as the student meets the refinancing lender's underwriting criteria without that cosigner.
Can I consolidate after I refinance?
  • No. While you can refinance your federal loans (including consolidation loans) into a private refinance loan, you cannot refinance private loans under the Federal Consolidation Loan Program.
Can I save more by consolidating?
  • If you currently have a variable rate federal loan, you can potentially save yourself from future rate hikes by consolidating. However, the rate you receive on your consolidation loan is the weighted average of all of your existing loans, plus 1/8 of a percent. You do not reduce your interest rate by consolidating. Furthermore, by extending your repayment term, you often pay more in finance charges in the long run, making the federal consolidation loan program a more expensive option than paying off the original loans within the standard term.
  • The interest rate you receive on a refinancing loan is determined by the program you are applying to, your credit worthiness, and sometimes other factors. This rate may be lower or higher than the rate on your existing loans so be sure you understand what your savings will be (either in total dollars or in the monthly payment amount) before applying.
How much does it cost to refinance education loans?
  • There is typically no cost associated with refinancing your education loans. Just be sure to ask the lender about any fees before applying.